RPT-Fitch: Chinese Developers Experiment with Small Stakes in Banks

Wed Jan 29, 2014 1:49am EST

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Jan 29 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says today that the recent trend of Chinese homebuilders taking small stakes in banks could pave the way for developers and banks to launch more comprehensive housing and financial products that appeal to more customers. Thus far, the bank stakes have not been large enough to have had a material impact on the liquidity and leverage positions for most of the rated Chinese developers.

Evergrande Real Estate Group (Evergrande; BB/Stable Outlook) is the most recent case, with the group saying on 24 January 2014 that it has bought a 4.5% stake in Huaxia Bank for CNY3.3bn.

It is not yet clear if having a strong affiliation with a bank can enhance a property developera€™s operating performance. However, Fitch expects large property groups will continue to be interested to strengthen their ties with banks. Developersa€™ large pool of home buyers is attractive to banks as prospective customers because they tend to be wealthier. At the same time, innovative banking products, including financing for property purchases, will help developers serve their customers better.

In 2013, China Vanke Co., Ltd (Vanke; BBB+/Stable Outlook) took an 8% share in Huishang Bank for CNY2.7bn while Yuexiu Property Company Limiteda€™s (Yuexiu; BBB-/Stable Outlook) parent company, Guangzhou Yuexiu Group Limited, is to acquire Hong Konga€™s Chong Hing Bank in a transaction to be completed in 1Q14.

There are also developers already affiliated to banks. They include China Resources Land Limited a€™s parent China Resources Group, which has been the controlling shareholder of China Resources Bank since 2009. Greenland Holding Group Company Limited (BBB-/Stable) owns a 4% stake in Shanghai Rural Commercial Bank, 3.8% of Bank of Jinzhou, and an undisclosed stake in Liaoninga€™s Panjing City Commercial Bank.

These investments in banks are small relative to the developersa€™ liquidity positions. Vankea€™s investment was only 7.3% of its CNY37bn cash balance in 3Q13 and 1.6% of its CNY171bn contracted sales in 2013, while Evergrandea€™s investment was only 10% of its CNY33bn cash in 1H13 and 3.3% of its CNY100bn contracted sales in 2013. Furthermore, both Huishang Bank and Huaxia Bank are listed, and thus the investments can be easily liquidated.

Fitch will closely monitor the developersa€™ M&A activity for any substantial investments that may result in a material deterioration in their credit profiles. In the long term, the agency will pay attention to possible synergies from the developer-bank ties that may benefit the developersa€™ business profiles. The closer ties may also lead to improvements in developersa€™ treasury and capital market management that help to reduce funding costs, which would support a strengthening of their financial metrics.

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